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Useful Advices - Shareholder Agreements and Buy Sell Agreements - The Business Valuation Formula
Normally shareholder agreements or buy sell agreements are written by the majority shareholder's very smart and experienced attorney and are totally favorable to the majority shareholder/Corporation.
According to USFDA, a combination product is one composed of any combination of a drug and device; biological product and device; drug and biological product
The minority interest shareholders are required to sign these agreements and often do not understand all the implications of what they are signing until it is too late. I will define too late as when
; or drug, device, and biological product and fixed dose combination would include two or more combinations of drug.
Examples of combination products may in
Examples of combination products may in
they are trying to exit the business and get a liquidity event at a value that is reasonably close to the value of the company multiplied by their percentage ownership in the company.
There are seve
There are seve
lude drug-coated devices, drugs packaged with delivery devices in medical kits, and drugs and devices packaged separately but intended to be used together.
ral approaches that we see used in determining the Purchase Price for shares of selling shareholders. The most common is Net Book Value. What net book value means is that you take all the assets and
here is enormous increase in the number of combination products entering the market in the recent years. Combination products have proven advantages but fixe
ubtract all the debts and you get the shareholder equity or net book value. To the untrained observer that would seem fair and logical. In reality, it is simply an accounting presentation and genera
d dose combinations are still in the process of convincing regulatory authority on their advantages over the single ingredient formulations.
Combination pro
Combination pro
lly has no relationship to what the business is really worth. An example is a company that owns a prime piece of real estate for their factory and the neighborhood has become hot. That facility was a
ucts have become life saving products for the pharmaceutical companies who doesn’t have many innovative molecules in their product pipeline and have been inc
cquired in 1968 for $2 million with half of the value in the building and half in the land. The building has been depreciated down to $400,000 and the land stays on the books at $1 million. A fair ma
easingly used in the product life cycle management. Even the companies having product patents are trying to extend their product life cycle through the combi
rket value of the facility is now $8 million and yet its net book value is recorded at $1.4 million.
Another weakness in this approach (for the minority, not the majority shareholders) is that there
Another weakness in this approach (for the minority, not the majority shareholders) is that there
nation products and maximize the revenues. But the companies involved in this practice are overlooking that they are burdening the patients both economically
s no value placed on the going concern or the good will. Let's say you are software company with 300 installed accounts, a cutting edge application and are growing at 30% per year. They might have 10
and physically. They need to rightly judge the benefits of the combination products and they have to even look at the risks involved when combining the produ
depreciated servers, some used office furniture and virtually no other hard assets. Their book value is $87,000. The true fair value for the company, according to a strategic buyer who may really wa
ts. Some of the combination products were well accepted by physicians while others suffered. Companies involved in development of combination products are fi
nt this company might be $25 million. The book value is not even in the same zip code as the true value of the business.
Sometimes the parties agree on an approach that is based on an appraisal from
Sometimes the parties agree on an approach that is based on an appraisal from
ding difficulty in defining their combination products and facing various challenges from selecting a combination to marketing it.
Following aspects would a
Following aspects would a
a qualified valuation firm. If you are a minority holder you are beaten before you have even started. Standard valuation practice allows for a “lack of marketability discount” of up to 40% and a “la
dd to the challenges in developing combination products:
Which markets to tap where the combination products can do fairly well?
Which combination prod
Which markets to tap where the combination products can do fairly well?
Which combination prod
k of control” discount of up an additional 40%. Say good bye to your ability to compel the corporation to give you fair value.
The best way is to establish a valuation formula that can be applied wh
The best way is to establish a valuation formula that can be applied wh
cts are meaningful and rational?
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin
en the agreement is put in place and also at a date ten years into the future. My favorite is an EBITDA multiple. A safe bet would be a 4 X EBITDA to establish the value of the entire company and the
tions increase the patient compliance?
What would be the developing cost?
How to tackle the risks encountered during combination product developmen
What would be the developing cost?
How to tackle the risks encountered during combination product developmen
n each shareholder would be able to get their ownership % times the company value. The company should have the ability to pay this out over 5 years at prime so that the event does not disrupt the com
t?
As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel
As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel
pany's capital structure. One note of caution, most small companies do everything possible to push down earnings which would depress the value of the enterprise using EBITDA. An example is salaries fo
ping new procedures for reviewing their safety, efficacy and quality.
Professional from academic institutions, pharmaceutical industries, health care indust
Professional from academic institutions, pharmaceutical industries, health care indust
owners and key employees that are above market (a constructive dividend). We use the term normalized EBITDA or Adjusted EBITDA to add back things like excess salaries, owner perks, and other expense
y and representatives from various regulatory agencies are working out to design the regulatory requirements for manufacture and sale of combination products
s that would not be allowed if the company were a division of a large public company.
I know what you are thinking. I already have one of these agreements in place, am a minority interest shareholde
I know what you are thinking. I already have one of these agreements in place, am a minority interest shareholde
.
As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de
As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de
r, I am leaving the company, and I want fair value for my stock. Unless you have the evidence, the stomach, and most importantly the deep pockets to pursue a shareholder oppression lawsuit, you are p
elopment. They need to be wiser in analyzing the market trends and the regulatory requirements.
Companies that provide selfless information through particip
Companies that provide selfless information through particip
retty much out of luck. We have developed some approaches that have been reasonably successful in improving the outcomes of these unfortunate stockholders, but that is the subject of a future article
tion in industry events and feedback to regulatory authorities would be able to face the challenges and will be successful in developing combination products
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